E-commerce companies in India have begun to raise their voices against the e-commerce entry tax being levied by many state governments. Flipkart already has a number of cases filed against local governments and now Amazon too has joined the fight. According toa report in the ET, Amazon has filed a lawsuit against Gujarat government “challenging the definition and the very concept” of this tax.

Gujarat government had passed a bill to levy entry tax on goods purchased through e-commerce portals on March 31, 2016. A person familiar with the case of Amazon told ET,

Amazon is only a facilitator and only arranging the buyers and the sellers on the portal, and is neither the importer nor the consumer, and the company as such has nothing to do with the goods. It is not a case where Amazon is purchasing and selling. The tax should be applicable to anyone who is importing items.

Flipkart has already filed a case against the Gujarat government on same grounds. In addition to Gujarat, several other states have also levied entry taxes on e-commerce. These include West Bengal, Uttar Pradesh, Mizoram, Assam, Bihar, Odissa, Rajasthan, and Uttarakhand.

Why are governments levying entry tax on e-commerce

E-commerce entry tax is supposed to be levied on goods which are purchased online. The state governments justify the tax in the name of providing a level playing field for offline traders.

These traders have been lobbying against online shopping entities for some time now. They have accused these companies of affecting their business by offering heavy discounts, backed by the investor money.

Another reason behind such taxes is the potential of revenues generated from them. Since e-commerce itself is a relatively new phenomenon in India, it is only recently that state governments have begun to levy these taxes.

Given the huge growth in online shopping which will only increase in future, state governments are looking to earn considerable revenues by levying taxes on online goods. For instance, UP government, which recently proposed an entry tax of 5% on e-commerce goods, is expecting to earn almost 600 crores in tax revenues during 2016-17.

Opposition to Entry Tax by e-commerce companies

However, e-commerce companies, as well as online trade regulation bodies and NASSCOM have raised objections against these levied taxes. A primary reason is because these entities serve only as marketplaces and do not directly sell goods to consumers.

According to Dr. A Didar Singh, Secretary General of Federation of Indian Chambers of Commerce and Industry (FICCI), such taxes would hardly contribute to state revenues but would hamper interstate trade creating barriers to market access.

Any special tax that is ecommerce specific will result in negating the benefits to Indian MSMEs and also to end-consumers at large, as the increase in taxes will ultimately make the goods more costly,

said Didar Singh.

Moreover, these taxes will most probably be for a short period of time till GST tax reform comes into play. And e-commerce companies will have to invest considerable resources to upgrade their system for including entry taxes.

Flipkart has already sued Uttarakhand and West Bengal state governments before Gujarat. Calcutta High Court gave its decision in favour of Flipkart by putting a stay on state government’s order.

However, the West Bengal government is planning to go to Supreme Court against the decision. This move could also be followed by other governments in future.